The USV Annals Volume 15,

of Economics and Issue 2(22),

Public Administration 2015

FACING THE ECONOMIC COMPETITIVENESS CHALLENGE IN

ROMANIA: THE INNOVATION ISSUES
Lecturer PhD Mihaela DIACONU
"Gheorghe Asachi" Technical University of Iasi, Romania
Department of Engineering and Management
mhl_dcn@yahoo.fr

Abstract:
This paper examines the main aspects influencing the innovative environment of Romania by analyzing the
levels and composition of innovation indicators and comparing with levels obtained by other countries. The
competitiveness of Romania is strongly linked to its position in innovation. The same indicators responsible for weak
innovation are linked to the poor composite innovation performance indicators such as the Summary Innovation Index.
That shows better the large gaps accumulated over time in all innovation dimensions, particularly in firms activities
and innovation output when they are compared to the EU average values and as such having repercussions on the
innovation performance index, implying economic mechanisms in mitigating the issues that Romania faces with.

Key words: innovation, research & development, competitiveness, performance, firm, Romania.

JEL classification: O31, O52.

1. INTRODUCTION

Numerous studies have emphasized the contribution of innovation towards improvements in

productivity, competitiveness and economic growth. This is why innovation activity indicators are
closely monitored and introduced in various indexes such as Global Competitiveness Index
reported by The World Economic Forum, The Knowledge Economy Index measured by The
World Bank, the Summary Innovation Index published by Eurostat etc., that can allow
comparability among countries or their evolution can be analyzed for the same country and provide
good information for policymakers. Without trying to analyze all indicators published or computed
by various international bodies, this paper aims at highlighting the main aspects that are not
favorable, but are persistent and characterize innovation activity in Romania, as well as their effect
on aggregate indices, including their impact on other components composing aggregate indexes. In
this regard, we consider an analysis of the main components of indicators impacting innovation
activities in Romania, offering international comparison.
Our motivation for developing this work results from observing the persistence of factors
that negatively impact innovation in Romania, that have not received adequate attention in the past
by innovation policy, but continue increasingly to hamper the innovation performance, growth and
economic competitiveness of Romania.
The rest of this papers is organized as follows. In section 2, we shape a comparative analysis
of competitiveness of Romania in the global context, identifying and highlighting the significant
gaps in comparison with other countries, mainly on innovation indicators. That shows that the
competitiveness of Romania is strongly linked to its position in innovation. The same indicators
responsible for weak innovation involved in shaping competitiveness are linked to the poor
innovation performance indicators analyzed in section 3. That context, by comparing with the EU
average, offers a better understanding of the large gaps accumulated over time in all innovation
dimensions, particularly in firm activities and innovation output, and as we have expected, in the
output indicators and as such having repercussions on the innovation performance index values.
The last section concludes and discuss the economic mechanisms in mitigating the issues that
Romania faces with.

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2. HOW INNOVATION CAPABILITIES INFLUENCE COMPETITIVENESS

Competitiveness is defined in The Global Competitiveness Report as the set of institutions,

policies, and factors that determine the level of productivity of a country (World Economic Forum,
pp. 4). The level of productivity further determines the rates of return and therefore growth rates in
an economy. Many factors drive productivity and competitiveness. The global competitiveness
index (GCI) captures various components of competitiveness of an economy. The last Report
provides an overview of the competitiveness performance of 144 economies, which contains
detailed profile for each of the economies included in the study, as well as data tables with global
rankings covering over 100 indicators grouped into 12 pillars of competitiveness. The GCI index is
built by aggregating of weighted average scores of the 12 pillars.
The scores are highly interdependent. For instance, a strong capacity for innovation (pillar
12) is difficult to be achieved without well educated workforce (pillar 4 and 5) that can assimilate
technologies (pillar 9), without sufficient funding (pillar 8), goods market efficiency (pillar 6),
depending also on the quality of a countrys overall business networks and the quality of individual
firms operations and strategies (pillar 11).
According to the GCI score, Romania is placed on a modest position (59 of 144 countries)
and most innovation related indicators are low when they are compared with the maximum levels
obtained in the study. Table no. 1 reflects the aggregate scores registered in the Romania case and
the distance (in %) from the maximum level of each score. As it can be seen, Romania is the 66th in
the world regarding the score of the pillar 12 (innovation), but its distance from the maximum score
is the highest.

Table no. 1. Romania in the global competitiveness ranking

according to the pillars in connection with innovation (year 2014)

Score Romania
Pillar Sub-indicator Max. Min. Romania rank
Score % of max. (out of
144 states)
Pillar 4 Health and primary education 6.89 2.72 5.58 80.98 88
Pillar 5 Higher education and training 6.22 1.94 4.63 74.43 58
Pillar 6 Goods market efficiency 5.64 2.92 4.18 74.11 89
Pillar 8 Financial market development 5.91 1.95 4.12 69.71 64
Pillar 9 Technological readiness 6.36 2.07 4.49 70.59 47
Pillar 11 Business sophistication 5.82 2.61 3.77 64.77 90
Pillar 12 Innovation 5.78 1.98 3.28 56.74 66
12.01 Capacity for innovation 5.88 2.49 3.70 63.92 68
12.02 Quality of scientific research 6.35 1.72 4.0 62.99 55
institutions
12.03 Company spending on R&D 5.94 1.96 3.13 52.69 65
12.04 University-industry 5.96 1.95 3.58 60.06 71
collaboration in R&D
12.05 Government procurement of 5.70 2.00 3.40 59.64 75
advanced technology products
12.06 Availability of scientists and 6.24 2.42 4.02 64.42 72
engineers
12.07 PCT patent applications 6.1 1.72 2.23 36.55 56
CGI Aggregate index 5.70 2.79 4.30 75.54 59
Source: World Economic Forum - The Global Competitiveness Report 20142015

The weakest level of innovation sub-indicators obtained for Romania are associated with
"company spending on R&D" (52.69% of maximum) and "PTC patent application" (36.55 % of
maximum). Although the place that Romania holds concerning other indicators is not able to have a
more favorable impact on the index of innovation, given the modest values of sun-indicators,

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research and developing (R&D) spending and hence patent applications, which are crucial for
innovation, remain extremely low.
The consideration of R&D as an inchoate stage in the process of innovation objectively
results from the connection between R&D and economic growth. R&D has direct implications in
firms or organizations developing (in-house) innovations, being generators of new/substantially
improved products or processes as well as having indirect effects in supporting innovation by
forming absorptive capacity, adapting of acquired technology and diffusing, and hence supporting
technology exploitation. In fact, the R&Dbased models of growth attest a close correlation
between R&D activity and technological innovation. According to Solows theory (1957), the
technological change is the major source of long term productivity and economic growth. In this
process, R&D is a key input in technological change (Romer, 1999), in acquiring knowledge and a
major contributor to economic growth and competitiveness. This is why R&D intensity is closely
monitored by various research and policy organizations.
Also, patents represent exclusive right to operate, use or sell an invention for a period of
time in the space where the application is made. Patents encourage the production of new
technologies in benefit of society, by allowing inventors appropriability of returns and recovering of
capital investments. Theoretically, patenting of inventions can solve the problem of imperfect
collection of revenues; exclusive rights granted by society increase inclination to invent by
restricting the use of inventions. Those mechanisms lead to expectations on the acquisition of ex-
post market power, being considered crucial in fostering innovation. As a result, from the point of
view of an innovative firm, patents can be regarded as mechanisms for maintaining or increasing
competitiveness. In terms of innovation policy, they are meant to spur innovation and economic
development, but the effectiveness of those mechanisms is conditioned by their design.
In general, the number of patent applications is used mainly as an intermediate indicator of
innovation and can be seen as a result of R&D activities performed by firms. However, the use of
indicators based on patented inventions data is not free of drawbacks (Diaconu (2012a). This is why
turnover corresponding to new to the market and new to the firm innovations is used more often as
an output of innovation process. In the same time, R&D expenses are used as input in many models
of innovation and in new forms of composite indicators calculated by different organizations.

3. RESEARCH AND DEVELOPIND - DRIVER OF INNOVATION

The aggregate R&D intensity in different states or regions is not only a matter of effort in
the R&D field, but also expresses a combined result of strategies of enterprises, of their
demography and that is a function of industrial structure and of macroeconomic dynamics.
The most used indicator in many innovation models is the R&D intensity, which is R&D
expenditure as % of an output measure. At the enterprise level, it is usually relevant the R&D
expenditure to turnover ratio. At the industrial or national level, R&D expenditure achieved in the
business sector, BERD, as % of added value or total production is used. At the national level, total
gross expenditure on research and development, GERD, as % of gross domestic product (GDP) can
be useful, expressing R&D expenditure in all sectors (business enterprise, government, higher
education and private non-profit sectors).
According to GERD/GDP and BERD/GDP, Romania is far behind the average of EU
member states, the stability in time of this gap being noticed in the following figures.

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2.5 1.4 1.27 1.28

1.2 1.24
1.17 1.19
1.94 1.93 1.97 2.01 2.01 1.2 1.12 1.11 1.13 1.13
2 1.78 1.78 1.85
1.76 1.76
1
1.5 0.8

1 0.6
0.4
0.5 0.52 0.57 0.49
0.41 0.45 0.46 0.45 0.48
0.38 0.39 0.2 0.21 0.2 0.22 0.22 0.19 0.18 0.19
0.17 0.17
0.12
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

EU average Romania EU average Romania

Figure no. 1 Total intramural R&D expenditure Figure no. 2 Intramural R&D
expenditure
GERD/GDP (%) BERD/GDP (%)
Source: Eurostat database - all sectors Source: Eurostat database, business enterprises sector

Used in order to make comparisons, R&D intensity is of importance from two points of
view. A significant dimension of GERD/GDP for a country reflects the technological progress and
the commitments in the area of creating of new knowledge.
Likewise, although BERD/GDP (figure no. 2) holds the greatest percentage of GERD/GDP
(figure no. 1), the significant and unfavorable gap in that dimension persists in Romania when we
compare its value with the level of indicators for the EU 28 average and this emphasizes that firms
adopt other innovation mode than based on R&D. The greatest proportion of BERD/GDP comes
from firms (internal and external funding from financial markets) in the EU 28 average (82%) as
well as in Romania (62%), and only a small proportion comes from government sector (7% and 2%
respectively in 2013). Therefore this gap is due, to a great extent, to the R&D expenses made in the
sector of enterprises. We also observe that, while most countries in the EU have raised their levels
of R&D spending, the trend of R&D in Romania is descendant in both indicators under the impact
of the economic crisis, which has become visible in decreasing of innovation performance
compared to last years as well.
At the same time, the greatest BERD/GDP percentage comes from the manufacturing
industry in Romania, even if its contributing part varies over time, together with the increasing of
R&D expenditure percentage in the services sectors and the quasi-constant maintenance of R&D
expenditure of the other sectors such as agriculture, extracting industry, constructions, production
and distribution of electrical energy and water (Diaconu, 2012a). A low level of R&D expenditures
has also impacted the performance obtained from innovation in Romania.

4. INNOVATION CAPACITY IN ROMANIA EVIDENCED IN COMPOSITE

INDEX

The competitiveness of Romania is strongly linked to its position in innovation and R&D
expenditure in one of the innovation inputs. In a larger context, the Innovation Union Scoreboard
incorporates 3 main types of indicators and 8 innovation dimensions, capturing in total 25 different
indicators in order to be analyzed the performance of the EU innovation system. As it is shown in
European Commission (2015), The Summary Innovation Index (SII, annually calculated for each
member state) takes into consideration 3 main types of indicators: The enablers capture the main
drivers of innovation performance external to the firm and cover 3 innovation dimensions (human
resources; open, excellent and attractive research systems; finance and support), Firm activities
capture the innovation efforts at the level of the firm, grouped in 3 innovation dimensions (firm
investments; linkages & entrepreneurship and intellectual assets) and Outputs that cover the
effects of firms innovation activities in 2 innovation dimensions (innovators and economic effects).

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The values of the innovation dimensions corresponding to the types of indicators are shown in the
table below for Romania and EU 28 average, alongside the gap (in %) between them.

Table no. 2. Average performance and variance in performance across the innovation
dimensions for the EU 28 average and Romania (year 2014)

Sub-indicator EU 28 Romania Romania (% of EU 28

average average)
Innovation enablers
Human resources 0.598 0.471 78.76
Open, excellent research 0.542 0.113 20.84
systems
Finance and support 0.556 0.147 26.43
Firm activities
Firm investments 0.454 0.080 17.62
Linkages & entrepreneurship 0.473 0.043 9.51
Intellectual assets 0.624 0.171 27.40
Outputs
Innovators 0.505 0.159 31.48
Economic effects 0.601 0.322 63.57
SII 0.555 0.204 36.75
Source: European Commission (2015)

Although the gap is obvious at all innovation indicators and dimensions, the most affected
by large differences are "linkages & entrepreneurship" (9.51%), "firm investments" (17.62%),
"open, excellent research systems" (20.84%), "finance and support" (26.43%), "intellectual
assets" (27.40%) and "innovators" (31.48%).
"Innovators" include 3 indicators measuring the share of firms that have introduced
innovations onto the market or within their organizations, covering both technological and non-
technological innovations (European Commission, 2015). Obviously, increasing of economic
competitiveness through innovation or transfer of scientific knowledge into practice decisively
depends on the involvement of business sector, including entrepreneurs. However, as we show in
figure no. 3, the proportion of innovative firms of the total firms was at the lowest level in
Romania of the whole EU area.

80

70

60

50

40

30

20

10

0
BE BG CZ DK DE EE IE EL ES FR HR IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK

Figure no. 3. Innovators of the total number of enterprises in the EU

Source: Eurostat database - Commission Innovation Survey (CIS 2012), all NACE sectors

That is why, without large representation of innovative firms in the innovation system,
including by R&D activities, economic performance cannot be achieved. Poor connecting of firms
to R&D and innovation or, alternatively, a low innovativeness level negatively impacts other
innovation indicators and dimensions such as "linkages & entrepreneurship", "firm investments",

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"open, excellent research systems", "intellectual assets". Low innovativeness level can be
determined by the lack of funds of Romanian firms. Multinational companies operating in Romania
are mainly adopters by importing technologies, as the R&D related structures remain concentrate on
the parent company. Conversely, "finance and support" and "firm investment" have determined
innovativeness level.
In fact, "finance and support" comprises R&D expenditure in the public sector and venture
capital investments. "Firm investments" include R&D expenditure in the business sector and non-
R&D innovation expenditure. Those dimensions are linked to innovativeness expressed by the
number of innovators and, on the other hand, to other dimensions shaped above.
The public R&D expenditure of GDP remains extremely low, but also the R&D expenditure
achieved in the business sector is very modest as we have shown. The venture capital investment
(the supply of funds), that is vital for firms in developing innovations, remains insignificant in
Romania as well. Innovative enterprises in early stages or expansion generate the demand for
venture capitals and that is a result of the research and development expenses carried out at their
level, and of the culture formed in the research and development field which, in turn, is fostered by
the government support (public R&D expenditures), including scientific research performed in
institutions of higher education and research.
That is why there is a strong link between R&D intensity and venture capital investments.
Statistic data of various countries show that the supply of venture capital increases to the increase of
technological opportunities in the entrepreneurial environment reflected by the amount of R&D
expenditures (Diaconu, 2012b). R&D intensity captures the activity of enterprises with R&D based
innovation. Applied on the case of Romania for the period 2000 - 2014, the direct link between
venture capital investments (in million euro) and R&D intensity expressed by GERD/GDP is shown
in the following figure (p < 0.05 all items):

180 180
Venture capital investments = - 155.66 + 497.67 GERD/GDP
investment
Venture capital investment

160 160
140 140
(millions euros)
capitaleuros)

120 120 R22 = 0.542

100 100
(millions

80 80
60 60
Venture

40 40
20 20
0 0
0.3 0.3 0.35
0.35 0.4
0.4 0.45 0.5
0.5 0.55
0.55 0.6 0.6
GERD/GDP

Figure no. 4. Venture capital investment - R&D intensity link in Romania

Source: Author's calculation based on the Eurostat data

There are many other factors influencing the venture capital investments in Romania
(Diaconu, 2012b), but the R&D intensity is the strongest. The dependence showed in figure no. 4
indicates that as the total R&D intensity increases, the venture capital investments increase and
highlights the importance of funding research and spurring of entrepreneurial culture. In fact, when
the gross expenditure on R&D rises, that means that both the number of firms that perform R&D
activities and the government support increase. Thus, increasing the efforts of the firms in research
activities and the culture formed in the R&D field promoted by the government support, reflected in
gross expenditure on R&D, has a positive incidence on venture capital investments, through the
direct impact on both the demand and supply of venture capital funds.
The absence of individual investors (business angels) and the poor representation of venture
capital supply coming from institutional investors to the early stages of innovative firms have been
a major impediment to the development of R&D intensive industries. That is why both "innovators"
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(referring to SMEs with product and process innovations, SMEs with marketing and organizational
innovations and employment in fast-growing firms innovative sectors) and "economic effects" (that
comprise especially medium and high-tech product exports, knowledge-intensive services exports
and sales of new to market and new to firm innovations) are modest as well. The "innovators"
dimension suffers of the very low percentage of SMEs with technological (product and process)
innovations, many SMEs of the innovative firms engaging in marketing and organizational
innovation. Therefore, the "economic effects" dimension cannot express mainly the medium-high
tech product and knowledge-intensive services exports and sales of new to market innovations.
This closest dimension to the European average is due to the new to firm innovations, which, we
can suspect, that they are not of the highest novelty or resulted from R&D activity.
Romanias innovation performance has declined most of all countries in the period 2013 -
2014 due to a very strong decrease in sales of new innovative products. Romania alongside
Bulgaria and Latvia belongs to the fourth group of modest innovators that includes member states
that show an innovation performance level well below that of the EU average, i.e. less than 50% of
the EU average. Among the modest innovators, the highest innovation progress is recorded in
Latvia and Bulgaria whereas a strong performance decline occurred in Romania which is at the
bottom of the performance scale in 2014 (European Commission, 2015). Romania shows also a
decreasing innovation performance compared to last year (figure no. 5).

0.6

0.5

0.4
0.3

0.2

0.1

0
2007 2008 2009 2010 2011 2012 2013 2014

EU average Romania

Figure no. 5. Trend of the innovation performance expressed by SII

in the EU average and Romanian
Source: European Commission (2015)

At the same time, while the average innovation performance expressed by SII in the EU
average register a slightly improvement, Romania shows a decreasing innovation performance.
Overall, the EU average annual growth rate of innovation performance has reached 1.0% over the
eight-year period 2007 - 2014 with most member states improving their innovation performance.
For Romania, the average annual growth rates are negative (European Commission, 2015).

5. CONCLUSIONS

This study is focused on a comparative analysis of the situation in Romania, in the context
of globalization and European integration, starting with highlighting the competitiveness gaps and
their dependence of the innovation system. The same indicators responsible for weak innovation
involved in shaping competitiveness are then linked to the poor innovation performance indicators.
From emphasizing the key dimensions of innovative processes over time and comparing
their main measures with quantitative values at the EU average, we are able to appreciate many
weaknesses that characterize also innovation in firms, and under the impact of various variables of
the national innovation system in Romania. Opting for various mechanisms for boosting innovation

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should be derived from the analysis of variables that characterize innovation activities, obstacles
faced by firms, including those in the financing of projects.
Regarding the input indicators associated with linear view of innovation, our data reveal that
both BERD/GDP and GERD/GDP, reflecting the commitments in term of creating new knowledge
and technological progress, have been at a level less than 1/4 in Romania compared with the EU
average, manifesting stability over time, but being affected by the impact of economic crises. That
shows weaknesses in the innovation system and in the entire Romanian economy as well as its
inability to manage key variables of economic competitiveness in times of crisis. BERD/GDP is
still strong influenced by the industrial structure, being the consequence of sectoral composition
influence that reflects structural effects and by the R&D intensity associated with each sector
emphasizing an intrinsic effect (Diaconu, 2012a). Strong influences of R&D intensity is also due to
the poor number of innovative firms, in particular the number of R&D innovative ones. The
consequences of low commitments in R&D are reflected in the innovation performance indicators.
In relation to the SII composite index incorporating elements of the national innovation
system, Romania ranks consistently in the group of modest innovators, summarizing the
weaknesses in all innovation dimensions, particularly in firms activities and innovation output.
Those are the consequence of a reduced number of innovative firms, low total R&D funding both in
firms and by the government support and weak public-private collaborative partnership. As a result,
a poor level of venture capital investments we have identified. The absence of individual investors
(business angels) and week supply of venture capital coming from institutional investors to the
early stages of innovative firms have been major impediments to the development of the R&D
intensive industries and innovation performance reflected in the output dimensions.
This result has important implications for the government policy, by boosting both the
demand and supply side of venture capital. Strengthening the demand by stimulating firms to
innovate and development of attractive investment projects needs mechanisms of direct and indirect
support, a good access to the research results publicly funded, including the transfer of the research
results to business sector to be valued and developed. An adequate means of entrepreneurial
stimulation is needed. Besides the entrepreneurial culture, an attitude of risk taking must be
cultivated and opportunities for small enterprises of getting outside the business on the secondary
markets must exist on the capital market.
In the same context, supporting the supply for venture capital is necessary, in particular for
seed and start-up stages that are uncovered by the intermediated market of venture capital. This
measure is able to meet the demand of these stages, including by facilitating the development of
networks for individual investors by providing of infrastructure support. Appropriate funding
mechanisms are needed for each innovation stage (Diaconu, 2012b).
We are in favor of direct support to innovation through grants targeted mainly at the SMEs
level, that would reduce their financing constraints, requiring cooperation with universities and
research institutions, improving qualitatively and quantitatively the effectiveness of innovation
processes and risk taking attitudes. In this manner, technological opportunities can come from the
sphere of fundamental research, aiming at restructuring industries toward the sciento-intensive ones.
Orienting innovation in Romania by stimulating the enterprises to engage themselves more
in research must be able to attenuate the considerable vulnerabilities that hinder the economic
development based on knowledge: the concentration of economic and creative capacities in several
sectors and, as a result, their dependence on the imports of technologies, on the external resources
of knowledge and the insufficient funding from venture capital resources (Diaconu, 2012a). The
institutional instruments conceived to support linkages with the technological frontiers or with
various markets and users can have also effects of diminishing the disadvantages of Romania
compared to the more advanced countries in innovation.
The financing of research has always been a big issue in Romania, although it's recognized
among the priorities of every government. Without a national strategy in innovation in the long-run,
which would effectively promote the national interests by addressing the increasing in demand for

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innovation, Romania will depend forever of imported technologies, without being able of exploiting
and benefiting of its native innovation capacity to increasing the living standard of its citizens.

BIBLIOGRAPHY

1. European Commission (2015), Innovation Union Scoreboard 2015,

http://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards/files/ius-2015_en.pdf
2. Eurostat database, http://ec.europa.eu/eurostat/data/database
3. Diaconu, Mihaela, (2012a), Performance paradigms in the innovation activity: the case of
Romania, Actual Problems of Economics, Vol. 9 (135), pp. 292-302
4. Diaconu, Mihaela (2012b), Characteristics and drivers of venture capital investments activity in
Romania, Theoretical and Applied Economics, Vol. XIX, No.7 (572), pp. 93-114
5. Romer, Paul, (1986), Increasing Returns and Long-run Growth, Journal of Political Economy,
94 (5), pp. 1002-1037
6. Solow, Robert (1957), Technical Change and Aggregate Production Function, The Review of
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7. World Economic Forum - The Global Competitiveness Report 20142015,
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf.

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